Chinese Yuan Hits 18 Year High Against Dollar

The world’s most anticipated currency revaluation continues at its traditional glacial pace. And while it is not a surprise to anyone, the overnight PBOC fixing for the CNY dropped below the psychological 6.50 level (or 6.4990 to be precise) for the first time since 1993. Granted, if the US and Chuck Schumer in particular were to stop pushing China to revalue, it would have long since done so at a faster pace, however in light of the diplomatic effort to force it to do so, the ongoing snail’s pace shift in FX will continue (and may well reverse now that even more legislation is introduced[2] to the “enforce” China’s currency manipulator status). Yet what is notable is that over the past 4 days the CNY has seen a dramatic 0.75% appreciation: easily one of the most aggressive weekly moves by PBoC bands. Is this move merely a political ploy to silence the critics, or is China truly starting to crack under the weight of its own inflation? We shall know soon enough.

The currency’s seventh weekly gain, its longest winning streak since July 2008, may damp U.S. criticism of China’s exchange-rate policy before Premier Wang Qishan heads to Washington next month for talks with Treasury Secretary Tim Geithner. Consumer prices in Asia’s biggest economy rose 5.4 percent from a year earlier in March, exceeding the government’s 4 percent goal for this year.

“Inflation is still higher than what the government would like to see,” said David Cohen, a Singapore-based economist at Action Economics, who previously worked for the Federal Reserve. “The central bank is tolerating faster currency appreciation to contain import costs.”

The yuan strengthened 0.17 percent to 6.4907 per dollar as of 2:50 p.m. in Shanghai, earlier touching a 17-year high of 6.4898, according to the China Foreign Exchange Trade System. It’s set for a 0.9 percent monthly advance, the best performance of 2011. In Hong Kong’s offshore market, the currency jumped 0.29 percent today to 6.4635, the biggest gain in Bloomberg data going back to Aug. 24.

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.

The “unusually fast pace” of yuan gains confirms that the yuan is being used to fight inflation, Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong, wrote in a note to clients today. He said there may be a “sharp gain” once 6.50 is breached and recommends buying the yuan against the greenback using non-deliverable forwards.

And for those wondering what China may peg to next until it launches its own SDR/gold/copper/coking coal/seaweed backed currency, here’s an artist’s impression. Recall, Chinese Exports to the EU are roughly the same as to the US.